Saudi Arabia escalated its oil price war with Russia on Tuesday as its state-owned company pledged to supply a record 12.3 million barrels a day next month, a massive increase to flood the market.

The supply hike -- more than 25% higher than last month’s production -- puts Aramco above its maximum sustainable capacity, indicating that the kingdom is even tapping its strategic inventories to dump as much crude on the market as quickly as possible.

Moscow responded within minutes, with Energy Minister Alexander Novak saying Russia had the ability to boost production by 500,000 barrels a day. That would put the country’s output potentially at 11.8 million barrels a day -- also a record.

It was the latest maneuver in what’s set to be a long and bitter conflict between the two former allies. Other members of the Organization of Petroleum Exporting Countries followed in their wake, with Iraq saying it would increase shipments by as much as 350,000 barrels a day next month, and Nigeria adding about 100,000 more.

The market is confronted with an unprecedented situation -- a huge supply surge combined with a historic demand slump from the coronavirus. On Monday, crude slumped almost 25%, the largest one-day drop in almost 30 years, creating mayhem in global equity and bond markets.

Oil prices rebounded on Tuesday, advancing alongside a broader rally in global markets. Brent crude was trading 9.6% higher at $37.64 a barrel in London on Tuesday morning.

Saudi Arabia has greater offensive capabilities, thanks to about 2 million barrels a day of idle production capacity. Riyadh can also use its strategic oil stocks to boost supplies on very short notice, according to people familiar with its strategy. On top of domestic stockpiles, it also stores crude near consumption hubs in Rotterdam, Netherlands; Okinawa, Japan; and the Egyptian port of Sidi Kerir. Russia doesn’t have a network of strategic oil stocks to match.

Russia may have the defensive advantage. The Kremlin can dip into its $150-billion wealth fund to offset the slump and bolster the ruble. Those reserves are sufficient to cover lost revenue “for six to 10 years” at oil prices of $25 to $30 a barrel, the Finance Ministry said.

In Saudi Arabia, if Brent crude remains at $35 without an adjustment in government spending, the kingdom would run a deficit of nearly 15% of economic output in 2020, while its net foreign reserves could run out in about five years unless it uses other funding sources, according to Abu Dhabi Commercial Bank.

For decades, the oil market has been largely regulated. First by Americans, who set production quotas for their companies through the Texas Railroad Commission in the first half of the 20th century, and later by the OPEC cartel. Through that time, Texas and later OPEC acted as swing producers, upping output at times of scarcity and reducing it at times of lower demand, to keep prices stable.

“Welcome to the free market,” said Bob McNally, founder of consultant Rapidan Energy Group and a former White House official. “The world is about to learn very swiftly how important a swing producer is for stability, not only for the global oil market but the broader economy and geopolitics.”

With oil demand rapidly falling due to the economic impact of the coronavirus epidemic, the Saudi production hike, followed potentially by another one from Russia, is likely to force companies to store crude, rather than process it. Traders are already seeking out tankers to store the glut.

The International Energy Agency earlier this week said that global oil demand will contract this year for the first time since the global financial crisis in 2009.

The U.S. and other Western countries are starting to worry about the oil price war between two of the world’s most powerful petroleum nations. On Monday, the U.S. Department of Energy denounced in a rare statement “attempts by state actors to manipulate and shock oil markets.”

Even as he responded in kind to the Saudi escalation, Novak reiterated his position from last week’s failed conference: Russia hasn’t closed the door on cooperation with OPEC.

In the final moments of last week’s gathering, the minister made a point of reminding fellow producers that Moscow was still prepared to continue its existing output cuts until the middle of the year. The alliance’s next meeting remains scheduled for June 9 and 10, but Novak said on Tuesday it could actually take place earlier, in May.

Other countries in the network, such as Algeria, Nigeria and the United Arab Emirates, have signaled that reconciliation may be a better way forward, as the impact of last week’s acrimonious split on the market becomes clear.

Aaron, although I do not disagree with your comment Keith likes to keep political replies limited to the Politics Group for the obvious reason that it can impact the more rational discussions on topics that the majority of members find of relevance. My reason for posting this particular article is to highlight that some OPEC members are responding to Saudi Arabia and Russia by following suit and dumping more low cost supply into the market. Maybe they figure the more intense the pain, the shorter the price war will last. If this goes on for more than a couple of weeks, the fall out here in the US will be a huge drag on the economy regardless of ones political views.

Skip: I think I heard Harold Hamm of Continental Oil say on one of the business channels that if oil reaches a certain price per barrel it would be illegal to import. I think he said $30 or maybe $35 per barrel. is that correct? Of course I may have heard it wrong too.

I don't think Mr. Ham meant illegal if he may have said it. I think Mr. Ham is providing an opinion that imports would not be profitable vs. domestic barrels considering transportation costs and any tariffs. This would be a general statement that does not take into account that refiners will always be importing some heavy crude since the US no longer makes enough. Oil from unconventional basins is light. In fact in some cases so light that is more properly classified as condensate (liquid at surface pressures and temps) than oil. It is ill suited to the range of products that refiners make.

I understand, Skip, but since the current administration is proposing a stimulus for the shale sector we should know the realm of politics and industry/economy have merged. I think it could hasten anti fracking sentiment. Just an observation

London (CNN Business)Oil prices are falling again Wednesday after Saudi Arabia doubled-down on its threat to flood the world with millions more barrels of crude despite the coronavirus shock to global energy demand.

Just a day after confirming that it would jack up production by about 2.5 million barrels per day starting April 1, state producer Saudi Aramco said it would increase its "maximum sustainable" production capacity by 1 million barrels to 13 million per day. In other words, the Saudis are digging in for a war of attrition.

"As this does not affect production in the short term, we believe this does not impact short term prices much, but could influence sentiment negatively, which explains the modest price decline today," said Bjoernar Tonhaugen, head of oil markets at Rystad Energy.

Brent crude futures, the global oil benchmark, and US oil were both trading about 3% lower on Wednesday. Brent prices have fallen by about 28% since Thursday, and 48% since a peak in early January.

OPEC, led by Saudi Arabia, had proposed additional production cuts through the end of 2020 but Russia refused to agree and warned it would produce as it pleases from next month in a bid to recover market share lost to US shale companies in recent years.

The falling out has opened the door to a free-for-all fight for customers just as the oil industry faces its biggest challenge since the global financial crisis. The coronavirus epidemic is destroying demand for fuel as air travel slumps and as efforts to contain the spread of the disease force businesses to close, at least temporarily.

Saudi Arabia told its preferred customers over the weekend that it would cut its official selling prices by $6 to $8 a barrel.Other members of OPEC are now piling in. ADNOC, the UAE's state oil producer, said Wednesday it was ready to supply 4 million barrels per day in April, up from about 3 million at present.

"In addition, we will accelerate our planned five million barrels per day capacity target," it said in a statement. It had been aiming to hit that target by 2030.

Russia shows no sign of blinking in the standoff with its erstwhile OPEC allies, as it sees an opportunity to undercut American energy dominance. The United States has supplanted Russia as the world's biggest oil producer thanks to the recent shale boom.

"Saudi Arabia announced that it had reduced the prices ... announced the increase in oil production. We believe that in these conditions this is probably not the best option," Russian energy minister Alexander Novak told state media on Wednesday. "It would be right to keep the production at the levels achieved in the first quarter."

Now, the energy meltdown threatens to cause a repeat of the 2014-2016 crash that bankrupted dozens of oil and gas companies and caused hundreds of thousands of layoffs.

It could also seriously damage countries such as Iraq, Angola, Nigeria and Algeria at a time of mounting concern about the health of the global economy because of coronavirus.

Fatih Birol, head of the International Energy Agency, told CNN Business on Tuesday that producers should stop playing "Russian roulette" with the oil market because it could have "grave consequences."

"The only thing I would hope, that in the oil markets, common sense will prevail and all the actors behave responsibly as the world is facing major challenges today," he told CNN Business' Richard Quest. "Weak economy and the coronavirus is a problem for all of us. If they don't do it, the citizens of this world will not forget it."

When sanctions piled on sanctions, by American administrations, tried to wreck economies there was little outcry. Time for American Zombies to taste the game, huh? I am sure some will try to parse American sanctions directed at Russia, China, and Iran. It was and is an act of provocation. Some consider it an act of war. Well, either way, our “friends” The House of Saud and our bogeyman Putin are enjoying the whines and whimpers.

Shale Tycoon Seeks U.S. Dumping Probe Into Saudi Oil Flood

March 12, 2020 EnergyNow

By Kevin Crowley and Alix Steel

Mar 11, 2020

(Bloomberg) Shale billionaire Harold Hamm intends to file a complaint with the U.S. Department of Commerce against Saudi Arabia for “illegal” dumping of crude that sent oil prices into a tailspin earlier this week.The Continental Resources Inc. founder will begin an investigation with an industry trade group, the Domestic Energy Producers’ Alliance, he said in an interview with Bloomberg TV. The Department of Commerce would have 20 days to accept it and could rule on it within 60 days, he said.

Saudi Arabia “has moved to essentially flood the market with crude oil” with “express intent to grab more market share,” Hamm said. “It’s illegal to do that.”

Hamm, who has acted as an informal sounding board to U.S. President Donald Trump on energy policy, said he hasn’t spoken to the president and the industry group is acting alone. Representatives of the Commerce Department, headed up by Secretary Wilbur Ross, didn’t immediately respond to emailed requests for comment.

“If they’re found guilty of dumping as we believe now they obviously are, if they’re found guilty of that, there could be countervailing duty to place upon all their imports to this country,” Hamm said. “That would be a drastic good measure that should be done.”

The U.S. shale oil industry is reeling from Saudi Arabia and Russia’s decision to ramp up production in a price war that sent crude plunging to the $30-a-barrel range, a level not seen in four years. With heavy debts, many explorers are operating at a loss at current prices and are being forced to cut rigs and production. That will harm America’s energy security, according to Hamm.

In recent days, the Trump administration has been considering a series of moves that would help aid the shale industry through the price slump, according to people familiar with the matter. They include buying oil for the government’s strategic reserve, lowering royalty rates for fossil fuels extracted from federal land and low-interest loans to aid producers. But such moves would likely be bitterly opposed in Congress, by both Democrats and Republicans.

“We’re not asking for a handout, we want a level playing field,” he said. “These people are taking advantage of a pandemic, this coronavirus, to try and wipe us out. That’s what’s going on.”

“These attempts by state actors to manipulate and shock oil markets reinforce the importance of the role of the United States as a reliable energy supplier to partners and allies around the world,” it said in a statement.

Good luck with that one. Maybe you should have stopped drilling uneconomic wells that caused the production increase that forced the hands of Russia and Opec. They finally had enough of giving up market share and said "hold my beer, watch this". Oh and also the stupid virus is shutting down the world too.

Department of Commerce will not do squat. Harold is spinning his wheels. I don't think it will serve to take his mind off the oil glut or COVID-19. Department of Energy may put out sound bites but they know that this is the free market and Saudi Arabia and Russia don't give a flip what they say. Nor will the rest of the world who will no doubt enjoy the cheap oil while it lasts.

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As exciting as this is, we know that we have a responsibility to do this thing correctly. After all, we want the farm to remain a place where the family can gather for another 80 years and beyond. This site was born out of these desires. Before we started this site, googling "shale' brought up little information. Certainly nothing that was useful as we negotiated a lease. Read More